The 3.1 per cent average decline in take–home pay in the year to April 2011 erased all the growth of the previous six years, leaving families no better off than in 2005, according to figures from the Department for Work and Pensions.

Rich households bore the greater share of the burden by taking a proportionately larger hit than poorer ones. Workers on incomes above £47,000 suffered a 5.1 per cent drop in take–home pay, while those on less than £9,500 lost just 1.1 per cent. As a result, there was a big reduction in income inequality but overall poverty levels rose.

The findings were made in the department's annual Household Below Average Income report and analysed by the Institute for Fiscal Studies (IFS), a think tank.

Jonathan Cribb, a research economist at the IFS, said the 3.1 per cent fall in average income in 2010–11 "was the largest one–year fall since 1981 and returned it to the level last seen in 2004–05".

He said the fall in median incomes showed that the effect of the recession on wages was starting to become clear and warned that worse was to come, with median disposable incomes in 2016 on course to be no better than they were in 2003.

He said income inequality had fallen as those on benefits had their incomes relatively better protected.

Households escaped a squeeze on incomes during the recession due to a fall in inflation and increases in benefits and tax credits to support families in the face of rising unemployment.

However, below–inflation pay rises, the withdrawal of benefits for middle–class families and higher taxes to fix the public finances have since eroded living standards.

The squeeze on families has been damaging to the recovery. Consumer spending, which accounts for about two thirds of economic output, shrank by 0.5 per cent last year. The squeeze on better–off households has narrowed the gap between rich and poor to its lowest level since 1998, according to an official measure of income inequality.

Child poverty rates also improved under the official measure, although the IFS pointed out that it reflected "a fall in the poverty line rather than an increase in the incomes of poor children".

Child poverty is defined as the number of children living in households with incomes below 60 per cent of the average.